Economic Fluctuations and Growth

Members of the NBER's Economic Fluctuations and Growth Program met in Chicago Fed on October 25. Research Associates Francisco J. Buera of Washington University in St. Louis and Ayşegül Şahin of University of Texas at Austin organized the meeting. These researchers' papers were presented and discussed:

Monika Piazzesi, Stanford University and NBER; Ciaran Rogers, Stanford University; and Martin Schneider, Stanford University and NBER

Money and Banking in a New Keynesian Model

Piazzesi, Rogers, and Schneider studies a New Keynesian model with a banking system. As in the data, the policy instrument of the central bank is held by banks to back inside money and therefore earns a convenience yield. While interest rate policy is less powerful than in the standard model, policy rules that do not respond aggressively to inflation - such as an interest rate peg - do not lead to self-fulfilling fluctuations. Interest rate policy is stronger (and closer to the standard model) when the central bank operates a corridor system as opposed to a floor system. It is weaker when there are more nominal rigidities in banks' balance sheets and when banks have more market power.

Chang-Tai Hsieh, University of Chicago and NBER, and Esteban Rossi-Hansberg, Princeton University and NBER

The Industrial Revolution in Services (NBER Working Paper 25968)

The rise in national industry concentration in the U.S. between 1977 and 2013 is driven by a new industrial revolution in three broad non-traded sectors: services, retail, and wholesale. Sectors where national concentration is rising have increased their share of employment, and the expansion is entirely driven by the number of local markets served by firms. Firm employment per market has either increased slightly at the MSA level, or decreased substantially at the county or establishment levels. In industries with increasing concentration, the expansion into more markets is more pronounced for the top 10% firms, but is present for the bottom 90% as well. These trends have not been accompanied by economy-wide concentration. Top U.S. firms are increasingly specialized in sectors with rising industry concentration, but their aggregate employment share has remained roughly stable. Hsieh and Rossi-Hansberg argue that these facts are consistent with the availability of a new set of fixed-cost technologies that enable adopters to produce at lower marginal costs in all markets. They present a simple model of firm size and market entry to describe the menu of new technologies and trace its implications.

Giuseppe Moscarini, Yale University and NBER, and Fabien Postel-Vinay, University College London

The Job Ladder: Inflation vs. Reallocation

Moscarini and Postel-Vinay introduce on-the-job search frictions in an otherwise standard monetary DSGE New-Keynesian model. Heterogeneity in productivity across jobs generates a job ladder. Firms Bertrand-compete for employed workers using the Sequential Auctions protocol of Postel-Vinay and Robin (2002). Outside job offers to employed workers, when accepted, reallocate employment up the productivity ladder; when declined, because matched by the current employer, they raise production costs and, due to nominal price rigidities, compress mark-ups, building inflationary pressure. When employment is concentrated at the bottom of the job ladder, typically after recessions, the reallocation effect prevails, aggregate supply expands, moderating marginal costs and inflation. As workers climb the job ladder, reducing slack in the employment pool, the inflation effect takes over. The model generates endogenous cyclical movements in the Neo Classical labor wedge and in the New Keynesian wage mark-up. The economy takes time to absorb cyclical misallocation and features propagation in the response of job creation, unemployment and wage inflation to aggregate shocks. The ratio between job finding probabilities from other jobs and from unemployment, a measure of the "acceptance rate" of job offers to employed workers, predicts negatively future inflation, independently of the unemployment rate, both in the model and in reduced-form empirical evidence that Moscarini and Postel-Vinay provide.

Fernando E. Alvarez, University of Chicago and NBER, and David O. Argente, Pennsylvania State University

Consumer Surplus of Alternative Payment Methods: Paying Uber with Cash

Alvarez and Argente estimate the private benefits for Uber riders from using alternative payment methods. They focus on Mexico, where contrary to the U.S., riders have the option to use cash or credit cards to pay Uber drives. The researchers use three large field experiments as well as several quasi-natural experiments to estimate the loss in private benefits for riders if a ban of cash as a payment method on Uber is implemented. They find that the Uber riders who use cash as means of payment, either sometimes or exclusively, suffer an average loss of approximately 50% of the expenditure of trips paid in cash before the ban. Further, the cost from the ban on cash falls disproportionately on lower income households.

Maryam Farboodi, MIT and NBER, and Peter Kondor, London School of Economics

Rational Sentiments and Economic Cycles

Farboodi and Kondor propose a rational model of endogenous credit cycles generated by the two way interaction of credit market sentiments and real outcomes. Sentiments are high when most lenders optimally choose lax lending standards. This leads to low interest rates and high output growth, but also to the deterioration of future credit application quality. When this quality is sufficiently low, lenders endogenously switch to tight standards, i.e. sentiments become low. This implies high credit spreads, low quantity of issued credit and a gradual improvement in the quality of applications, which eventually triggers a shift to lax lending standards. The equilibrium cycle might feature a long boom or a long or double-dip recession. It is generically different from the optimal cycle as atomistic lenders ignore their aggregate effect on the composition of borrowers. Carefully chosen risk-weighted capital requirements can implement an optimally cycling economy.

Martin Beraja, MIT and NBER; Rodrigo Adão, University of Chicago and NBER; and Nitya Pandalai-Nayar, University of Texas at Austin and NBER

Technological Transitions with Skill Heterogeneity Across Generations

How do economies adjust to technological innovations? Beraja, Adão, and Pandalai-Nayar develop a theory where overlapping generations of workers are heterogeneous over a continuum of technology-specific skills. Forward-looking investment decisions upon entry determine the worker's skill-type. Given a type's technology-specific wage, workers self-select into a technology. The researchers show that this economy can be represented as a q-theory of skill investment. This allow them to sharply characterize the transitional dynamics and welfare implications of a technology-improving innovation. The adjustment is slower in economies with higher technology-skill specificity because the larger increases in relative wages induce larger, more persistent changes in the skill distribution across generations. Beraja, Adão, and Pandalai-Nayar then empirically study the adjustment of developed economies to recent cognitive-biased technological innovations. They find strong responses of cognitive-intensive employment for young but not old generations. This suggests that cognitive-skill specificity is high and that the supply of cognitive skills is elastic at longer horizons. In such economies, ignoring the adjustment across generations by extrapolating from changes at short or long horizons alone leads to severe biases in the average and distributional welfare implications of technological innovations.

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